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Orange Inc has a capital budget of 1.5 Million. The company is forecasting a target captial...

Orange Inc has a capital budget of 1.5 Million. The company is forecasting a target captial structure of 60% dept and 40% equity. The company is forcasting net income of 750,000. If the company follows a residual distuction model and pays all distributions as dividends what will be the company's payout ratio? Please show work.

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Answer #1

Answer:

Distributions = Net Income – [Total Capital Budget * Target Equity Ratio]

Net Income = $750,000
Total Capital Budget = $1,500,000
Target Equity Ratio = 40%

Distributions = $750,000 – [$1,500,000 * 40%]
Distributions = $750,000 - $600,000
Distributions = $150,000

Payout Ratio = Distribution / Net Income * 100
Payout Ratio = 150,000 / 750,000 * 100
Payout Ratio = 20%

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